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The Potential Market for Income Share Agreements Among Low-Income Undergraduates: An Issue Brief for Policymakers and Advocates

With the price of college rising unabatedly and concerns mounting over education debt, each new policy or practice that holds the promise of containing prices or helping graduates better manage their borrowing is met with anticipation. Income share agreements (ISAs)—in which students pledge a portion of their future income to an investor who provides money today to help meet college expenses in exchange—are one such innovation.

Proponents of ISAs argue that they offer several advantages over student loans; unfortunately, the widespread use of ISAs to support the educational aspirations of low-income undergraduates in particular may run headlong into the priorities of those offering this type of financing.

This first brief in a series about ISAs explores their potential to serve low-income undergraduate students. The primary goal was to estimate the number of such students who might plausibly be offered an ISA in today’s market.

Key Findings

Only a handful of firms are actively offering students ISAs in support of their educational pursuits.

If ISAs were to become widely available to support undergraduate study, under current underwriting criteria, we estimate that no more than 7 percent of each year’s entering, first-time student cohort would likely be eligible to receive this type of funding (about 272,500 students).

Given past and current practice, the potential of ISAs for lower income students appears even smaller, with no more than 5 percent of first-time, lower income students likely being eligible for an ISA (about 82,000 students).

If there were changes to the supply side of the ISA market, then students who are likely to earn modest incomes but who have relatively lower funding needs might be targeted for ISAs.

Industry experts suggest that the number of firms poised to offer ISAs either directly to students or indirectly through other types of organizations (e.g., alumni associations) may grow through 2016, further expanding the usefulness of this innovation in financial aid.

Related Work

Many students rely on student loans as a way of covering college expenses and for many, loan repayments exceed their ability to repay, leading to financial distress or default. Income share agreements are an income-driven college financing option in which an investor provides a student with the funds required to pay for college and, in return, the student promises to pay a percentage of their income for a number of years after leaving school. These resources offer a better understanding of how, and for whom, income share agreements may work.

The second in a series about income share agreements, this brief addresses the likely impact of ISAs on how campus financial aid offices will award student aid and the implications of ISAs for campus reporting on student aid, drawing on expertise from financial aid officers and the National Association of Student Financial Aid Administrators.

This brief, the fourth in a series about ISAs, addresses evidence that suggests loan aversion may be especially prevalent among underserved and underrepresented students. The brief concludes that ISAs could provide an alternative to student loans—in particular, for loan-averse individuals whose views of student debt are determined primarily by negative experiences with debt among family and friends, thereby removing one key barrier to college-going for this population.

A relatively new college funding model designed as an alternative to loans is unlikely to help most students, particularly poor students who need it most, according to a new study.
The AIR study examines the potential of income share agreements, which essentially allow investors to buy stock in students, to combat the college loan crisis that is leaving thousands of graduates and drop-outs each year with crushing debt.

In this blog post, AIR scholar Audrey Peek explores income-share agreements (ISAs), a private form of financial aid that offers cash for college now in return for a percentage of students’ future earnings over a set time. Peek contends ISAs are an innovative way to pay for college that might benefit some students, but which aren’t likely to reach their full potential without fundamentally rethinking who they could serve and how funders are repaid.

As Purdue University and other schools prepare to offer income share agreements (ISAs) to students, these new programs could put students in a sticky situation. AIR researcher Audrey Peek explains that if they don’t understand the tradeoffs of loans versus ISAs, students could end up replacing their federal loans with much more expensive ISAs.